Understanding Cash and Cash Equivalents

• Cash is the most liquid asset, serving as the standard exchange medium.
• Cash is typically classified as a current asset.
• Cash includes coins, currency, and funds on deposit at a bank.
• Negotiable instruments like money orders, certified checks, cashier’s checks, personal checks, and bank drafts are considered cash.
• Savings accounts are generally considered cash, even though banks have the right to demand notice before withdrawal.
• Money market funds, money market savings certificates, and certificates of deposit with restrictions are classified as temporary investments rather than cash.
• Money market funds with checking account privileges are usually classified as cash.
• Postdated checks and I.O.U.s are treated as receivables.
• Travel advances are treated as receivables if collected from employees, otherwise, they are classified as prepaid expenses.
• Postage stamps are classified as office supplies inventory or as a prepaid expense.
• Petty cash funds and change funds are included in current assets as cash used for current operating expenses.

Cash Equivalents

• "Cash and cash equivalents" is a popular current asset classification.
• Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash.
• Cash equivalents have insignificant risk of value change due to interest rate changes.
• Only investments with original maturities of three months or less usually qualify as cash equivalents.
• Treasury bills, commercial paper, and money market funds are examples of cash equivalents.
• Some companies combine cash with temporary investments on the balance sheet, with descriptions in notes.

Long-Term Cash Classification

• Cash classified in the long-term section can be set aside for plant expansion and retirement of long-term debt.

Compensating Balances

• Banks often require customers to maintain minimum cash balances, known as compensating balances.
• Compensating balances are defined as a portion of deposits that support borrowing arrangements with a lending institution, as defined by the SEC.
• The SEC recommends that legally restricted deposits held as compensating balances against short-term borrowing arrangements be stated separately in current assets.
• Restricted deposits for long-term borrowing arrangements should be classified as noncurrent assets, like "Cash on deposit maintained as compensating balance."
• Compensating balance arrangements without restrictions should be described in the notes.

Explore the definition and classification of cash in accounting. Learn what qualifies as cash, including negotiable instruments and certain savings accounts. Understand the distinction between cash and temporary investments, receivables, and prepaid expenses.